Biglari Holdings Losing Focus?

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Sardar appears to be losing his focus. While he is out investing in acquisition targets and railing against existing management and trying to force his way into boardrooms, the restaurants are turning in rather uninspiring numbers. There is no expansion of company stores, no franchises being sold and spending is all going to holdings for his hedge fund.

The easy money has been made as restaurant operations were tightened and senseless, profit-eating expansion was stopped. Now investors need to start seeing some care and attention lavished on the biggest moneymaker he has so far—Steak n Shake.

The comps are still positive and there are increases year over year. But the rapid rate of growth has stopped and double digit/high single digit comps are making way for low single-digit comps. The slowing growth may be one reason the price per share dropped from $460 early in 2011 down to the current $312

Revenue and franchise growth is non-existent. In fact, Western lost a franchise. Biglari early in his takeover of SNS was looking to grow through aggressive franchising. Either he is waiting for something or no one wants a WEST of SNS franchise.

I find his language discussing closings interesting. Restaurant Operations suffered no closings of underperforming company-owned restaurants or transfers to franchisees while closing just one Western Sizzlin franchised unit. Also during the current year-to-date period, Steak n Shake opened one company-owned restaurant and endured no franchise closures while opening four new franchise units.

Suffering and enduring are emotionally charged words. It’s almost as if he would be in pain closing franchises and company stores. It probably does not explain his lack of energy getting new stores and franchises on board, but the thought of having to close anything seems almost unbearable to him. Is he afraid to expand? Maybe a stretch -— leave the psychology to professionals.

Growth in revenue is anemic for SNS and WEST has declining revenue.

I could find no discussion of WEST’s improved operating income. WEST company restaurants were a disaster as a standalone company and they rarely made profits. It may be that there are operating efficiencies that were realized.

Franchise fees increased $188 or 10.0%. The number of franchised was 161 July 7, 2010 to 164 July 6, 2011. They decreased sequentially.

Cost of sales was $48,144 --- 28.8% of revenue. COGs was 27.6% last year and the 2011 increase was due to inflation in commodity prices.

The increase in operating cost contributing to contracting operating margins was from manager training, repairs and maintenance, insurance, and unemployment taxes.

SG&A was up as a percentage of total net revenues from 6.2% to 7.1%. The increase is due to efforts to franchise the Steak n Shake concept and accrual of the incentive compensation. We should see more franchises next Q? Something to look for.

For the restaurant segment of the business, it’s not bad but it’s not great either. The high growth that intrigued investors 2009-2010 is winding down as the easy fixes have been put in and now he has to show he can competitively run a fast casual restaurant chain in a world that is full of good to great competition. The promotional sales do not seem to be driving big increases in traffic and now we have traffic numbers that more closely follow same store sales that would indicate he is no longer giving a lot of freebies to customers. That should make franchisees happier. Without giving away food and Coke glasses can he create higher same store sales and customer traffic? Q3 is supposed to be a big Q and comps barely budged consecutively. Q2 to Q3 2010, they were up nearly 2 1/2%.

There are no new SNS franchises, which is puzzling. They spent SG&A during the Q to promote franchises but failed to add any. So far this has been a very disappointing growth strategy.

The investment arm of BH is as opaque as he claims CrackerBarrel’s reporting is. There are numbers but ultimately, BH shareholders do not know anything pertinent about Lion Fund. This is not an equitable arrangement IMO. BH shareholders get to pay for investments that go into Lion Fund but they get no useful information about how those holdings individually are performing.

Consolidated Affiliated Partnerships Investment Gains (Losses)

Net realized gains were $749K were dispositions of investments held by consolidated affiliated partnerships and an unrealized investment gain of $482K. They were offset by $639K related to earnings attributable to redeemable noncontrolling interests At least they did not lose money or so it seems. The stock picking this year has been mediocre—Sonic performance is about flat from August 2010 with some big runs in between, RRGB sold before the big run up, CCA industries and Penn Miller. Penn Miller has appreciated slightly but the last 10K shows declining BV, earnings losses and a combined ratio in excess of 100%. CCA also continues to lose money and the price per share may be down from his acquisition price. It has dropped around 10% since April.

YTD the partners have a realized gain of $3.3 million from selling stock. Investments held directly by the consolidated affiliated partnerships usually consist of domestic equity securities.

Partnerships also hold BH stock.

As of July 6, 2011 and September 29, 2010, the consolidated affiliated partnerships held 205,743 shares of the Company’s common stock ($69,221 at cost) and $0 and $7,540 of Debentures, respectively.

Biglari Holdings’ pro-rata ownership of its Company common stock and Debentures through the Lion Fund was 100,374 shares of stock (with a fair value of $39,251) based on Biglari Holdings’ ownership interest in the Lion Fund on July 6, 2011.

In 2010, Biglari Holdings invested a total of $35.7 million in the Lion Fund. The fair value is now $48,414. During 2010, they bought BH, Fremont, Sonic,& Red Robin. They do not include 2011 acquisitions and their value. Most of the 2010 were marginally profitable—RRGB and Red Robin. Fremont appreciated rapidly due to acquisition so those shares did well. It was his bidding war that sent it up not his stock picking acumen. The other big winner was shares of BH picked up at lows in June 2010.

All of this information is approximate since I don’t have the prices paid or what they realized in sale The 13 D/As don’t say. It’s this kind of information that should be disclosed since it was $35 million taken out of restaurant cash flow to make the investments. More transparency would be a great benefit to reading these filings since Biglari will not hold conference calls.

Liquidity and Capital Resources

CFFO was $49,820 YTD compared to $49,675 in 2010.

Net cash used in investing activities of $65,743 during the current year-to-date period was primarily a result of net purchases of investments. Net cash used in investing activities of $27,565 during the same period of fiscal year 2010 included purchases of investments of $51,866.

Net cash used in financing activities was $14,319 compared to net cash used of $38,348 during the same period of fiscal year 2010. The decrease resulted primarily from the purchase of shares of BH stock by consolidated affiliated partnerships in fiscal year 2010.

All this is to say that the restaurant cash flow is funding the investments for Lion Fund and yet shareholders get no real details of what happens in the fund. We do know that 2010 investments saw positive returns but that was largely good timing buying BH shares and benefiting from a bidding war on Fremont. How much different is this than the request to see CrackerBarrel’s store and restaurant reported separately in detail? IMO the case for more transparency at BH is stronger since restaurants are very obviously paying the price tag on LF acquisitions. Shareholders deserve to know what their cash is doing. Cash was drawn down significantly at the end of 9 months.

Investments in the restaurants themselves are de minimis. There are no new builds and no new franchises. Growth is slowing. Looks a little lopsided. At some point, there will need to be resurgence of growth in the restaurant business to fuel investments for LF.

Investments carried on the balance sheet increased to $116,743 July 6, 2011 from $32,523 in September 2010. The increase is primarily related to significant investments in equity securities. I suspect a lot of these are not doing well.

“We intend to meet the working capital needs of our operating subsidiaries principally through anticipated cash flows generated from operations, existing credit facilities, and the sale of excess properties.”